Nonprofit Sector

The Importance of Financial Leadership

November 24, 2015

Through the Community Resilience Fund (CRF), NFF partnered with 17 New York City human service providers to strengthen financial models, and in doing so help preserve the services that make up the city’s social safety net.

Working with executives and boards of social safety net organizations, we see time and again the critical role that strong leadership plays in ensuring organizations stay financially adaptable enough to maintain a high impact on their communities. While the importance of good leadership may seem obvious, what’s less obvious is what exactly makes for a good leader. From NFF’s nonprofit finance perspective, the most effective leaders typically have a sophisticated understanding their organization’s economics, making decisions grounded in financial realities. They are then able to able to use that financial information in their communication, demonstrating the strategic connection between mission and money. Below, we refer to these three characteristics of strong financial leadership as ‘Knowing,’ ‘Doing’ and ‘Communicating.’

Knowing: Effective leaders have access to accurate and management-oriented financial data

At the core of strong financial leadership is the ability to understand how programmatic and administrative decisions are likely to impact the organization’s financial health. This is far easier said than done if you don’t have a transparent and actionable view of your financial data.

Among CRF participants, we found that many organizations arranged their internal financial reports to reflect the contract regulations of their funding agencies, rather their own planning needs. This structure of financial reporting can lead to decisions that conform more to a funding agency’s priorities than an organization’s own financial needs. To address this problem, we worked with CRF participants to deconstruct and rearrange financial reports to show their numbers in a way that helped their leaders make better decisions.

During this process, Committee for Hispanic Children and Families (CHCF) discovered that while one of their major contracts was covering its direct costs, it was generating little net revenue to defray the substantial administrative expenditures that far outweighed the overhead coverage the contract provided. For CHCF, reframing the financial data was far from an academic exercise. It provided clarity about the profitability of programs and exposed an administrative burden that wasn’t captured in their original financial reports. As a result of this new view of their numbers, CHCF leadership decided they had to walk away from the contract for the sake of their organization’s overall financial stability.

Doing: Effective leaders know how to interpret and use their data to inform decisions

For CHCF, having management-oriented financial reports was only the beginning of the decision-making process. Choosing between strategic options can be daunting when each of those options speaks to different priorities. One of the best ways to narrow the field is to assess each option using a consistently applied set of criteria. Beyond clarifying how you make decisions, a consistent process makes it far harder to justify intuitive or biased choices that are contradicted by your numbers.

Through CRF, NFF worked with the leadership team of the African Services Committee (ASC) to decide among a range of potential growth opportunities. Each had potential to fulfill part of the organization’s mission but came with different financial implications. Together, we evaluated each of these options using the following criteria:

  • What is the direct net revenue potential?
  • What is the up-front investment that would be required to get the program off the ground?
  • How much time would it take to come to scale?

As a result, ASC determined that several options were either too big to safely take on, or too small to provide a level of revenue that could meaningfully support the enterprise. The expansion of ASC’s nominal fee legal clinic emerged as an option that would effectively balance community need, scalable net revenue generation, and the ability to invest gradually in order to limit financial risk.

In the end, the best data in the world can’t prevent nonprofit leaders from having to make difficult or even painful choices sometimes, but it can allow nonprofit leaders to make clear-head decisions that they can readily explain to various stakeholders.

Communicating: Leaders must be able to incorporate financial data into a story about where the organization is headed

A communications strategy may not be the first thing that comes to mind when one thinks of financial management. Yet in our work with nonprofits, we consistently find that a clear and accurate narrative about the organization’s financial condition and needs is one of the key requirements for effective leadership. In some cases, financial storytelling can help secure buy-in on budgeting decisions with internal audiences like staff and board members. At other times, it helps to describe to a potential funder how a grant fits into a broader financial strategy.

The importance of communication emerged most clearly in our work with Leake & Watts. Their leadership team was particularly interested in understanding the affordability and financial impact of the organization’s debt load, which they were looking to restructure. Through a collaborative process, we determined together that restructuring would reduce their interest payments and contribute to sustainable operations over the coming years. We then worked to shape a communications strategy for upcoming conversations with their board and lenders. What resulted was a narrative grounded with financial information that explained why the restructuring would benefit both Leake & Watts and its lenders. This helped Leake & Watts reinforce their lenders’ confidence in their financial management and facilitated a smooth debt restructuring process.

Where to Go From Here

Strong leaders have the unique ability to effectively coordinate and connect financial reporting, governance, and communications. But even if finance isn’t a leader’s core area of strength, there are a variety of ways to build those skills over time by as asking a few initial questions. For example, are your financial reports useful for making strategic—rather than compliance-based—decisions? Is financial information consistently incorporated into strategic planning and decision-making forums such as executive team and board meetings? Are you as easily able to discuss your organization’s financial strategy as you are its programmatic strategy? If some of these questions don’t elicit a confident ‘yes,’ then you may have a starting point for a rich dialogue.

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